Thursday, February 3, 2011

Arab anger may trigger Asian angst

For Asian governments the unrest in the Arab world may spell trouble if oil prices rise which, in turn, would raise inflation and add to domestic food costs

TURMOIL in the Arab world equals an inflationary spike in oil prices equals the risk of social unrest.

That is the unappetising political economy equation facing governments across Asia, including China, as they seek lessons from a popular uprising in Tunisia and deadly clashes in Egypt.

It would be lazy to assume that the anger of disenfranchised Arabs will translate into similar pressure for change in Asia. But it would be just as wrong to assume that the region has nothing to learn from the causes of the revolt in Tunisia and Egypt, including high unemployment, a yawning gap between rich and poor and frustration over a lack of political freedoms.
"What you will have is a greater focus on social and political risk in the coming year," said Bob Broadfoot of Political & Economic Risk Consultancy Ltd in Hong Kong.

Economic unknowns range from how high oil prices could rise if protests spread to big Middle East producers to the impact on the Philippines of any curtailment of remittances from scores of thousands of migrant workers in the region.

Broadfoot's initial assessment was that the unfolding unrest would not be as earth-shaking as, say, the subprime lending crisis in the United States, which led to a collapse of Asian exports as the global financial system tottered.

"I don't think the straight economic fallout is going to be so profound that it causes the developing countries of Asia to lose a lot more momentum than they would have done anyway," he said.

After an exceptionally strong 2010, growth this year is still likely to average six per cent.

"But I am concerned on the political side," Broadfoot said. "This could change the status quo and challenge assumptions that were being made at the start of the year."

Dominique Dwor-Frecaut, a strategist with Royal Bank of Scotland in Singapore, said the risk of political contagion to other emerging markets was largely limited to the Middle East.

Majority Muslim countries Indonesia and Malaysia are established democracies and do not appear at risk of widespread anti-government demonstrations, she said.

"On the other hand, emerging markets with low per capita income, including Indonesia, are likely to be more vigilant with food prices going forward, possibly through a mix of subsidies and additional policy tightening," she wrote in a blog.

As for China, the ruling Communist Party reaffirmed just how sensitive it is to issues of political stability by restricting some Internet micro-blog comments on the protests in Egypt.

Rioting in 2009 in the far-western region of Xinjiang, where Muslims make up a substantial minority of the population, demonstrated to Beijing how seeming social calm can suddenly shatter. Nearly 200 died in ethnic violence.

"Tunisia and Egypt have brought that home in spades to the leadership, and they're no doubt wary of the potential triggers that can set things off," said Alistair Thornton, an analyst with IHS Global Insight in Beijing.

One such trigger is inflation, which is already uncomfortably high at 4.6 per cent and could rise further, according to Chinese central bank governor Zhou Xioachuan.

The risk is that dearer oil boosts imported inflation and adds to domestic food costs by increasing farmers' transport and fertiliser bills.

"They'll be very concerned what social implications that has, given that quite a large part of people's disposable incomes is going towards food," Thornton said.

China has rolled out an array of administrative measures in recent weeks to try to tame food costs, and Thornton said he would expect more of the same if prices headed higher. He said Beijing was also likely to increase subsidies and take more steps to reduce the gulf in wealth and incomes that is a major source of resentment among ordinary Chinese.

Beijing's challenge in tamping down inflation is that the economy is awash in cash, the legacy of a stimulative monetary policy launched to counter the global financial crisis in 2008.

Andy Xie, an independent economist who used to work for Morgan Stanley, has fiercely criticised major central banks, especially the US Federal Reserve, for inflating a succession of asset price bubbles by keeping policy too loose for too long. In Xie's view, the unrest in the Middle East has to be seen in this broader context: corruption and oppression provided the tinder for the explosion of anger; inflation set it alight.

"Loose money has caused the riots in Tunis and Cairo," Xie said in an email. It was no coincidence, he said, that food and energy prices started to rise last year right after the Fed floated the idea of relaxing policy further.

Even if unrest does not spread to energy-producing countries, the rising risk to their stability will boost oil prices anyway, Xie said. He said he still expected another global crisis late next year, triggered either by a collapse of the US treasury market or a hard landing in emerging economies.

"The political events in the Arab world point to another possibility: surging oil prices could sink us all earlier."

As for food, rice prices are still only around half of the peak levels scaled in early 2008, he added. The odds were that this reflected the release of stockpiles by East Asian governments.

"We don't know how long the reserves can last. When the turning point comes, the rice price could double or even triple quickly," Xie said.

"There are a lot more rice eaters than wheat eaters in Asia. What is happening in North Africa -- a wheat-eating region -- could spread to Asia."

"The Egypt developments are unravelling assumptions about political stability in emerging market countries into question almost overnight." said Tina Fordham, political analyst at Citi.

That could see investors demand a higher risk premium on investments particularly in authoritarian emerging economies, refocusing attention on potential political and succession risks in countries previously seen to be stable.

Recent events may make other leaders more worried about being swept from power -- making them perhaps turn to food subsidies, capital controls and other measures possibly including censorship and crackdowns to try to stave off unrest. -- Reuters

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